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ICGN Frankfurt Conference: German corporate governance in the context of global capital markets Opening Address Dr Joachim Faber, Chairman of the Supervisory Board of Deutsche Börse AG, Member of the Board of Directors of Allianz France, Member of the Board of Directors of Coty Inc., New York, Member of the Board of Directors of HSBC Holding Plc, London, Chairman of the Shareholders Committee of Joh. A. Benckiser SARL, Luxembourg and Member of the German Corporate Governance Code Commission, Germany: Ladies and gentleman, on behalf of Deutsche Börse Group, I am pleased to welcome you to today’s International Corporate Governance Network event, and presented in co-operation with the Deutsches Aktieninstitut and Deutsche Börse. I also would like to extend a special thanks to Christian Strenger, whose persistence has, brought this event to Frankfurt. Corporate governance is currently confronted with complex developments and faces efforts to bring about change on an international level. Some of the key questions raised in this context are, what best practice approaches are available? How do Governments deal with actions initiated by Brussels, the OECD, or third parties? Where can we see initial evidence of positive of negative consequences of supranational regulation, and where is still, room for self-regulation? For answers, it’s worth taking a look at the financial markets. They are leading the way. Investors have long regarded Europe as a regional market, and even globally, some standards have been defined as general benchmarks. The debate, around successful corporate governance, should also identify options to effective homogenisation, and to take them to implementation. By the same token, it is important to take national differences into account, and to allow flexibility. This is because it is the only way to harness the potential of self-regulation, similar to other areas, corporate governance must allow as much self- responsibility as possible, and keep Government regulation to the necessary minimum. Self-responsibility means that the widest possible range of players, from politics, the economy, and society, must be able to take part in the debate. This is why the Corporate Governance Commission, on the German Corporate Governance Code, is also engaged in a dialogue with its European and international counterparts. These efforts should be aimed at speaking with one voice, and developing joint statements, in order to allow scope for effective and responsible self-regulation. Self-regulation is an appropriate approach to solving many of the financial sector’s problems, and I am somewhat puzzled that after the financial crisis, the financial industry never made a serious attempt to try to solve its deep problems, by self-regulation. The financial industry left it to the regulators, left it to people who have never traded a structured derivative, have never appreciated what the appropriate risk capital should be, in one of those trades and I have to say, I’m not surprised that Basel III and EU regulators are going for nothing else, than for more capital, because this is the easy way out. Can we really assume that Civil Servants, are knowledgeable about financial engineering in our industry, and the same with exchanges. Exchanges are a very complicated animal, so can we really assume that regulators in Brussels, in Berlin, in London, have a deep understanding? Frankly, for me, self-regulation is the only solution, but it obviously means that we are not only going for razor 1 sharp competition, but for a change, we also look for the best interest of the industry as a whole. Corporate governance stopped being an exclusively national issue a long time ago. A large number of initiatives and regulations start in Europe, or are triggered by organisations such as OECD. The increasing trend towards super national regulation, contrasts with quick fixes, implemented at a national level. We, here in Germany, have a very bad example. As much as the Kodex Commission was supposed to look at issues such as compensation and female representation in boards, the Legislator felt politically pressured, to decide this by law, and therefore shrank the room of self-regulation. A look at current models for implementing corporate governance shows that most of the world is set to an Anglo-Saxon approach in corporate governance, and Brussels is no exception. Latest EU directives and OECD initiatives are heavily influenced by Anglo-Saxon principles, of a monistic corporate governance structure. Mark Carney, Governor of the Bank of England, and the Chairman of the Financial Stability Board said, “Ensuring the Bank of England has the instruments necessary to achieve its financial stability objective, will depend on the EU continuing to have regulations of the highest standards, which strike the appropriate balance between harmonisation on one hand, and flexibility on the other hand, and which accommodate necessary national responsibility, including for supervision.” I think this is a statement everyone here in Germany, in the debate about unitary board or dual board structures could easily subscribe. The Anglo-Saxon system of corporate governance is not in universal use. As you are aware in Germany, the management board and supervisory board are independent from each other. Legislators believe that this dual system is the better approach. There are plenty of arguments in favour of separating operational responsibility and supervision, with critical feedback. Not least because it has evolved historically, and has been proven, in practice, for generations, that the German industry has not badly suffered in its performance, from a dual board system. German co-determination is considered something special. Particularly in the Anglo-Saxon world. Many find it difficult to accept that there are employee representatives on the supervisory board. But this is not a national phenomenon. 18 out of 24 EU member states now have laws specifying employee representation on supervisory boards. In Germany, this system has led to some positive experiences. On one hand it makes it more difficult to get a majority for controversial issues, while on the other hand, it incorporates more operational level input into the decision process. What is more important is the fact that employee representatives, who share responsibility, can lead to great acceptance of decisions. Decisions among the workforce. As a result, jointly developed solutions are often to the benefit of the company. How major are the differences between the dualistic and the unitary board systems really? Would it not be more forward looking to think of fruitful ways of closing the gap, and turn them into reality through effective self-regulation? My own experience tells me that the effectiveness of supervision does not depend on a unitary board, or a dual system board. I’m on, in the United States, on a consumer products board, one-tier board. In the United Kingdom, I am on a bank board, a one-tier board. I have been on eight DAX boards in my life, obviously two-tier boards, and I have to say it simply depends on the people who are running it. You can have a unitary board, with a very shy Chairman, who will not be a very good controller, and who will be perfectly consumed by a strong CEO, who is sitting on this board. You can have the same with a weak two-tier board Chairman, and a strong CEO and the 2 reverse is exactly the same. If you have a strong Chairman and strong board members, it doesn’t matter whether you have a unitary board, or a dual board. The board meetings in the dual system are held together with management, until a certain stage when there has to be a Non-Executive session. Same in the one-tier board, you also have 80% Non- Executives together with the Executives, but you send them out if something has to be debated, among the Non-Executive Directors themselves. So, from my point of view, this difference is exaggerated, and I would be very happy if we could have an in-depth debate, how those bridges can be built at a further conference. This would be a good opportunity to discuss these kind of approaches, and increase awareness among the audience, so that super national corporate governance bodies can limit their involvement to building a regulatory framework that creates order, while at the same time leaving enough scope for responsible self-regulation. Another encouraging development that deserves a special mention is the stakeholder approach is increasingly taking hold in international corporate governance practice. We traditionally consider that on the continent there is a stakeholder approach and Anglo- Saxonia has committed to a shareholder orientation. You should only have a look at Larry Fink’s letters as the icon of an Anglo-Saxon investor who owns about five to 7% in each single corporate. He has made no secret, in his view, that the ultimate success for shareholders from a company and the ultimate performance, can only be driven by a company which also takes care of all the other stakeholders. Let me talk briefly on the EU Shareholder Rights Directive. With its recommendation on the quality of corporate governance reporting, the European Commission wants to provide guidance to listed companies, investors and other interested parties, on how the general quality of Corporate Governance Declarations, published by companies, can be harmonised throughout Europe and improved. A particular focus is on the quality of the explanations provided, if they deviate from the recommendations of the respective Corporate Governance Codes. But the transparency requirements apply not only to companies. The OECD says, in its principles “Institutional investors acting in a fiduciary capacity, should disclose their corporate governance and voting policies, with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights.” And of course, institutional investors and proxy advisors, have a fiduciary obligation to form an opinion, and base their voting behaviour on it.

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